8-23-05 [finance]There are some major things go on in the world markets and I continue to puzzle over how to exploit them to make a big profit.
First of all, oil. There're lots of funny short term things going on with oil supplies - Ecuador's riots, Iraq's instability, refinery outages, etc. Those will go away and take off some of the pressure. Certainly there's no doubt that long term the supply/demand equation for oil will continue to drive prices up, so oil stocks will probably outperform the market overall for quite a while. I've ready many analysts that speak of a potential worldwide depression if oil prices get much higher (say, $80) similar to the recession of the 70's, and that depression would lead to a crash in oil prices. That sounds like nonsense to me. More likely, high prices in oil would lead to a wide-scale slowing in growth as the world adjusts to a less oil-dependent economy. Prices for oil wouldn't crash, demand would level out and go down gradually. Basically if we could come up with an alternative power source that cost X dollars for an equivalent amount of energy to a barrel of oil, that would set the price of oil to be X with only slight variation. Unfortunately, that's all still rather long term, and in the short term there could be a little dip. One possible investment here is in the new energy technology sector. Fuel cell companies' stocks have already skyrocketed, and will probably keep going up (certainly if anything actually ever goes into production they'll go up, but I'm pesimistic). I have more faith in new technologies like better refineries, tar oil extraction, propane/methane conversion, etc.
Second, real estate. In general, real estate is a good investment, not because it outperforms stocks in general (it doesn't) but because the tax breaks in US Law make it ridiculously favorable as an equity investment. We are currently in a big spike. Whether it's a bubble or not, or when exactly it will pop, is unclear. It will correct at some point, markets always do, and home values will come down. The particularly scary thing about this is how much of the US economy is in real estate, and how much of consumer spending is coming from home refinances, etc. A banker friend of mine recently told me about the rise of "NegAm" loans; I was like wtf is negam? "neg am" is short for "negative amortization" which means you have a mortgage where each month you pay off less than the interest, so that some amount of the interest accrues onto the principle each month. That's okay as long as the value of the property is going up faster than the principle accrues, but if the market crashes, it's an absolute disaster. It allows people to buy very expensive property and pay low monthly rates, but if you have to sell, you can take a huge loss. I can't really think of a good way to make money on the market crash, the best I've come up with is just to wait with cash and buy when it's cheap.
Together the oil & real estate markets make me very afraid of the US economy, not in a gloom and doom sense, but just in a maximize my returns over the next 5 years sense. I think offshore investments look good, though places like China will also be very badly hurt if oil gets expensive and the US consumers stop buying.